The Commodity Futures Trading Commission (CFTC) got an earful from hedgers during an April forum in Washington D.C. to collect information on price discovery and record spikes in volatility in the agriculture markets. Producers didn’t hold back, urging the CFTC to look at the increase in speculative money coming into the market. “The market is broken, it’s out of whack, and somebody’s got to step in and give some relief,” said Billy Dunavant of cotton merchandiser Dunavant Enterprises. “We need to get back to trying to function as a futures market that has some stability. Traders and commercial hedgers need to be treated on a totally different basis than speculators and commodity funds.”
Mark Keenum of the U.S. Department of Agriculture noted that increased volatility in futures markets and sharply higher prices have led to higher margin requirements and increased cost of hedging. “Cotton shippers and some grain elevators are no longer bidding for future delivery because of risks and costs associated with maintaining hedges,” Keenum said, adding that the situation has raised fears that cash and futures markets will face convergence problems.
The CFTC seems to realize the increasing burden that speculative money has put on traditional hedgers, as Acting Chairman Walt Lukken said the agency will hold off on its plans to increase spec limits. “Given current market conditions and the uncertainty surrounding additional speculative money on these markets, I will be very cautious about moving forward with such initiatives at this time,” he said.
Putting spec limits on hold is the right decision, says Bill Biedermann, senior vice president at Allendale. “Speculative money versus the actual cash industry money involved in the markets is out of balance, and giving the speculator more room to trade would create an even bigger imbalance,” he says.
Elaine Kub, analyst for DTN, says, “Any effort to discourage speculators is a double-edged sword. If the CFTC doesn’t allow the exchanges to be as friendly to big speculators as they want to be (raise the limits as high as they see economically prudent), this could chase funds into OTC transactions, exchange regulated or not, that will just cloud ag futures markets’ transparency,” she says.
Many experts at the forum offered advice on what the CFTC could do to help producers during the volatility storm. Joe Nicosia, CEO of Allenberg Cotton Co., EVP of LouisDreyfus Commodities and incoming president of the American Cotton Shippers’ Association, suggested the CFTC monitor swap and OTC positions. Tom Coyle of the National Grain and Feed Association said the CFTC should include a more specific breakdown of commercial versus non-commercial interests on its Commitment of Traders (COT) reports.
Biedermann says the CFTC should “restrict the amount of volume of speculative money, re-regulate hedge funds and redefine what a hedge fund or hedger really is or change the delivery system, [either to] a delivery system that’s more broad across the country to get a better representation of cash markets, or [to] a cash settlement.”
Kub believes that the COT reports should be expanded and that the information in charts presented by the CFTC at the forum that broke out net long and net short positions into commercial merchants, managed money funds and commodity index traders should be freely available. “Then, we could prove with statistical certainty whether or not participation by one group or another is actually creating market inefficiencies or not. That would lead to better suggestions for fair regulation. As it is, index funds and swap dealers can get through loopholes into gray areas on the current COT, and therefore, no market effects can be properly attributed to their participation with full mathematical integrity,” she says. CFTC Commissioner Michael Dunn says the response to the current COT reports has been very positive thus far, and that the CFTC could consider expanding them (see Chartview).
Kub notes that although the forum was a good first step in the CFTC’s examination of ag market volatility, more concrete solutions need to be presented. “The major drawback from the meeting was that very few solutions were suggested that could help market participants deal with the greater volatility,” Kub says. “The CFTC’s challenge is to arrange a way to select worthy changes — no easy task, because any change will receive competing lobbying — and then actually implement them.” In testimony before the Senate on May 7, Lukken said the CFTC is aiming to release initiatives based on information discussed at the forum in the near future.